529 Plan
A 529 plan is a tax-advantaged savings plan designed to help families save for future education expenses, offering tax-free growth and withdrawals when used for qualified education costs.
Exam Tip
529 = tax-free growth for education. Can change beneficiary. State tax benefits vary.
What is a 529 Plan?
A 529 plan is a tax-advantaged investment account designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states and educational institutions.
Key Features
| Feature | Description |
|---|---|
| Tax Treatment | After-tax contributions, tax-free growth and withdrawals |
| Contribution Limits | High limits (often $300,000+ lifetime per beneficiary) |
| Qualified Expenses | Tuition, room & board, books, computers, K-12 tuition (up to $10,000/year) |
| Control | Account owner controls the funds, not the beneficiary |
Types of 529 Plans
| Type | Description |
|---|---|
| Education Savings Plan | Investment account, can use at any eligible school |
| Prepaid Tuition Plan | Lock in current tuition rates at specific schools |
Tax Benefits
- Federal: No deduction for contributions, but earnings grow tax-free
- State: Many states offer tax deductions or credits for contributions
- Withdrawals: Tax-free when used for qualified education expenses
Flexibility
- Change beneficiary to another family member
- Use at any accredited school nationwide (savings plans)
- Roll over to Roth IRA (up to $35,000 lifetime, after 15 years)
- No income limits to contribute
Non-Qualified Withdrawals
If funds aren't used for education:
- Earnings taxed as ordinary income
- 10% penalty on earnings
- Principal returned tax-free
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Related Terms
Roth IRA
SecuritiesA Roth IRA is a retirement account funded with after-tax dollars that grows tax-free and allows tax-free withdrawals in retirement, with no required minimum distributions.
IRA (Individual Retirement Account)
SecuritiesAn IRA is a tax-advantaged personal retirement savings account that individuals can open independently, offering either tax-deductible contributions (Traditional) or tax-free withdrawals (Roth).